How the Intra-Day Momentum Method can Help You Make Better Trading Decisions

  • May 23, 2013
  • Todd Hudson
How the Intra-Day Momentum Method can Help You Make Better Trading Decisions

Historical Probability of Reversal

Upon finding Levels that allow me to ascertain that the historical probability of a stock closing in the direction of these levels was approximately 50%, my goal was to reduce the probability of a reversal.  A reversal is defined as a day when both the Long Level Up and the Short Level Down are reached in the same trading session.  After arriving at my initial findings, I had developed an algorithm that had found levels that would allow for a stock to create a reversal to the other side of the Open, by approximately the same distance in price roughly 30% of the time.  In order to create a more robust method, I began to adjust for specific price patterns, which allowed me to improve on the results to some degree.  Making further modifications to the algorithm allowed me to find Levels that historically generated a reversal approximately 25% of the time, for many stocks / ETFs.  I am actively searching for new ways to better improve the method and feel that I will be able to effectively generate reversal probabilities less than 20% of the time, for many stocks / ETFs.

The Intra-day Reversal

AAP Reversal Chart

The Momentum Method was designed in an attempt to avoid this scenario, as much as possible.  On 4/30/2013, AAP reached the Short Level Down and then rallied to cross above the Long Level Up.  Historically, this has happened 23% of the time, in AAP.  The Intra-day Reversal has occurred approximately 25-30% of the time, in many stocks. 

False Moves come From Fast Moves

If the Momentum Level is reached in rapid time, it is possible that this is a move that is not sustainable.  Fast moves often come off the Open and can reverse rather quickly.  These moves are often generated by news or some other event that many believe to be relevant, but in fact may not be.  By fast move, I am referring to the time from the Open to when the price is met.  If this price is reached too fast, it is often to the benefit of the trader to take a reversal of the trade.